7 ms·

US Junk Bonds Post Worst Losses in Six Months, Spreads Widen

TaylorSwift 1y ago
can someone explain what this means for the general economy? my understanding is that the spread widening is compared against the US treasury bill, and these junk bonds' prices are going down. as the junk bond prices decreases and the demand for yield increases, this increases the cost of borrowing and can potentially create a ripple effect of defaults. recent cracks where these these companies issued junk bonds include First Brands, Tricolor, and Saks: https://www.bloomberg.com/news/features/2025-10-12/first-brands-tricolor-wipeouts-show-cracks-in-credit-golden-age https://www.bloomberg.com/news/features/2025-10-12/first-bra...
- epolanski 1y ago
  > can someone explain what this means for the general economy? Borrowing rates reflect other indices like 10-year treasuries, not short-term ones.
- ajross 1y ago
  My slightly informed cynical opinion is that if a consensus existed for what this meant for the general economy, plenty of experts would be telling you. So, we don't know. Feedback effects ("ripple effect" in your usage) are a genuine risk of economic systems, but by their nature they aren't predictable. You get the non-linear feedback we're all terrified of (a "crash") when some buffer or another runs dry: some notable demographic needs money, normally gets it from place X (for example: selling stock, repackaging and selling mortgage securities, raising a series B round, issuing corporate bonds, etc...) and suddenly X doesn't produce the same returns. So they need to do another one of those things, which drives that price down, which causes the demographics that depend on that resource to run dry, etc... This is a metric for just one buffer: the amount of cash available to issuers of high interest bonds. Is that the tipping point? We don't know, and won't until it tips.
  - mooglevich 1y ago
    Great comment :) I used to be pretty into junk bonds during my MBA (I don't do this at all professionally, so YMMV with my commentary here), and I think, as usual, a lot of context would help with understanding what this could mean, which ajross described. In the most simple terms, as other have also mentioned, it's basically non-investment grade companies (and there are a lot of em - you'd be surprised at the names on the list) now have to pay more for money. This could mean that investors are worried and want more compensation for risk, which means that the reality of the economy is shakier. OTOH, it could mean that investors are being more realistic, and not letting risky companies just have cheaper money to make value destructive decisions could be a good sign of sanity in the markets, and thus (in theory) the economy. It's hard to know with a simple headline or article. Even if you dig into all the numbers and do all the reading, it's still hard to know since the world is really complex. I look at this as a single data point amongst many re: how I end up assessing my feelings about the economy. Truth be told, I'm probably more concerned about what lots of news outlets are discussing - all the AI capex spend. Apparently there's more financing being negotiated with fewer restrictions on the debt, which tends to be a really bad sign of a bubble.
    - ajross 1y ago
      All that said, my slightly informed mildly-hysterical opinion is that aggregate downside risk is absolutely out of control in the markets right now. Valuations of basically everything are at all time highs relative to production. Volatilities are high. And non-economic risks are off the charts. Basically, everyone is placing too many bets. AI stocks are bets, sure. VCs have too much money in play. Datacenter spending is a giant bet. But the Trump administration is also placing bets on world trade markets, expecting to win the trade wars it keeps provoking. Likewise it's betting on US labor stability with mass deportations, and now para-sorta-maybe-martial-law decrees. I mean, let's be honest: the risk of a general strike in the USA is probably higher now than at any point in the last century. Oh, and Russia seems about to hit a tipping point in its refining capacity, which says dark things about Europe too if that goes awry. Basically most of these look "not really that scary" from a fundamentals perspective. But what are the chances we make it through the next 9-12 months with none of them having gone sour? And any of them could be the trigger for a real market crash! I'm moving almost everything out of volatiles, personally. The loss of the next 10-20% of upside seems like a good bet vs. what-maybe-50%-or-more downside.
- quitit 1y ago
  US Junk Bonds can be used as an early economic indicator. Potentially indicating downturns in GDP and increases in unemployment up to one year earlier than other indicators. When Junk Bond yields are low, it suggests investor confidence is high (and a low risk of corporates defaulting). The article notes that yields are rising, this is understood to be a signal of economic uncertainty (i.e. greater chance of defaults/increased risk of investing.) There are considerations to be made regarding about what caused the changes - in this case the presidents declaration of additional tariffs on China. Since this is an arbitrary decision, and not say the result of an economic trend, the certainty around the correlation is lower. Nevertheless the randomness of the actions are themselves a source of uncertainty, which too scares away investment.
- fny 1y ago
  This doesn't mean a lot. People made bets on lower rates which drove money into junk. Those prices renormalized to levels seen over the past year. In fact, lots of business had the opportunity to roll their debt over the past year, so bankruptcy in the medium term seems unlikely. The broader question is why now and so quickly. In my view, people got way over their skis in rate-based trades which drove a lot of things higher including tech multiples. This likely why we also have the NASDAQ down 3.5% in a single session. [0]: https://www.tradingview.com/chart/?symbol=AMEX%3AJNK https://www.tradingview.com/chart/?symbol=AMEX%3AJNK
- Spooky23 1y ago
  The weaker companies experience the impacts of financial stress more quickly, and investors start to flee to safety. Running an economy based on the whims of a decrepit old man and the weirdos he surrounds himself with introduces a lot of risk. It doesn’t mean that the end is nigh, but large money flows are going towards lower risk.
- NoboruWataya 1y ago
  It's difficult to say with any certainty what it means for the general economy, but your understanding of what this is saying about the junk bonds themselves is basically correct. Whether it leads to a lot of defaults depends on a lot of factors. A sell-off in bonds can really screw a company if it happens to have immediate financing needs at the time, but otherwise it doesn't really impact the company directly. Junk bonds are, as the name suggests, known to be risky assets, so they are generally the first to be sold when things get a bit choppy and investors decide to sit the market out for a bit to see how events unfold. This seems like it is pretty clearly a response to the recent tariff escalation so, as with all the other tariff announcements, it will depend on whether the recent announcement is a change in policy or another negotiating tactic. You also see a lot of headlines like "worst losses in six months!" "biggest sell-off since September!" but these are fairly short timeframes and a lot of this is just trying to make some news out of the usual market noise.
- seanhunter 1y ago
  Bond spreads widening reflect lenders' fear that borrowers will default. So what this means is that on average people think that the lowest class of borrowers (junk) are going to struggle to repay. That means it is more expensive for them to borrow, which is going to generally discourage those companies from investing in projects or starting new things which require debt finance. So you would expect the knock-on effect to be less activity in general.
- Ekaros 1y ago
  Barely surviving companies might die. And stop employing people, buying and selling... Thus they can then have at least short term effects on both up and downstream... So in worst case enough triggers might result in larger collapse. Basically big enough issue anywhere not just in AI might bring rest down with it.
this_steve_j 1y ago
https://archive.ph/sxOOn https://archive.ph/sxOOn
- dmix 1y ago
  > The US junk bond rally came to a halt on Friday with the biggest one-day loss in six months, as the risk premium surged to near a four-month peak of 304 basis points. Yields climbed to 6.99%, the highest in more than two months. > The losses accelerated after President Trump threatened to impose huge tariffs on imports from China and said he saw no reason to meet with Chinese President Xi Jinping, causing concerns about trade relations between the world’s two biggest economies. > The weekly loss of 0.73% was also the biggest since April. The losses spanned across ratings amid the renewed tariff fears. Junk bond yields rose 15 basis on Friday and 31 basis for the week, the biggest increase in six months. > CCC yields rose above 10% to a five-week high of 10.14% and spreads widened to a six-week high of 632 basis points. Spreads climbed 32 basis points on Friday, the most in one day since April. CCCs racked up a loss of 0.6% on Friday, the worst one-day loss in six months. CCCs closed the week with a loss of 1.05%, also the most in six months. graph https://dgz78a1ch9fm7v.archive.ph/sxOOn/4d36a1090f1a44927848814c63cbf300bba82f38.jpg https://dgz78a1ch9fm7v.archive.ph/sxOOn/4d36a1090f1a44927848...
francisofascii 1y ago
Seems like a non-story. Junk bonds are corralated with equities, so Trump's tariff comment caused equities and by association junk bonds to go down.
- delfinom 1y ago
  Yes, but there's also an indicator that the size of the losses is correlating to "size and sentiment of junk bonds", meaning, there may be a few too many building up. Ultimately, if equities seesaw enough, there can be some collapsing.
Havoc 1y ago
US economy in general is starting to make me nervous. Quite hard to diversify away though because that means missing out on AI boom and if the US shits the bed then chance are everything else gets sucked down with it
- rkomorn 1y ago
  Yeah, I really don't know what scenario leads to the US economy not dragging down the rest with it. Is there an argument that other economies would recover better than the US, in the long term? But at that point, one could just diversify during/after the crash.
  - toomuchtodo 1y ago
    Not investing advice. I diversified away from the US to international equities VTI -> VSUX starting at the beginning of the year. My thesis is that trade is rearranging due to US trade policy. If you look at the S&P500, growth has been flat since 2022 for anything that isn't Big Tech AI bubble. Therefore, I believe that between go forward US economic policy and global trade reconfiguration, non US will outperform the US over the next five years.
    - rkomorn 1y ago
      Maybe not investing advice but reasonable-sounding nonetheless.
    - matwood 1y ago
      I also adjusted some towards VXUS which was a great move in hindsight from fx alone. I bought property in the EU a couple years ago which is also benefiting from fx moves. With that said, the biggest US companies are pretty exposed internationally already. I'm not sure someone needs to or it would be prudent to say dump VOO and move to VXUS 100%.
      - toomuchtodo 1y ago
        Agreed; to be clear, I still have US equities exposure, but it has been reduced to <50% of my total securities portfolio. This balances, imho, potential gains with managing risk around valuations. "Be fearful when others are greedy."
josefritzishere 1y ago
The Shiller ratio also indicates the US economy is in for a major correction. https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe
- staticman2 1y ago
  Yeah but trading based on Shiller ratio wouldn't have worked out so well in the last 10 years so who knows.

can someone explain what this means for the general economy? my understanding is that the spread widening is compared against the US treasury bill, and these junk bonds' prices are going down. as the junk bond prices decreases and the demand for yield increases, this increases the cost of borrowing and can potentially create a ripple effect of defaults. recent cracks where these these companies issued junk bonds include First Brands, Tricolor, and Saks: https://www.bloomberg.com/news/features/2025-10-12/first-brands-tricolor-wipeouts-show-cracks-in-credit-golden-age https://www.bloomberg.com/news/features/2025-10-12/first-bra...

epolanski 1y ago
> can someone explain what this means for the general economy? Borrowing rates reflect other indices like 10-year treasuries, not short-term ones.
ajross 1y ago
My slightly informed cynical opinion is that if a consensus existed for what this meant for the general economy, plenty of experts would be telling you. So, we don't know. Feedback effects ("ripple effect" in your usage) are a genuine risk of economic systems, but by their nature they aren't predictable. You get the non-linear feedback we're all terrified of (a "crash") when some buffer or another runs dry: some notable demographic needs money, normally gets it from place X (for example: selling stock, repackaging and selling mortgage securities, raising a series B round, issuing corporate bonds, etc...) and suddenly X doesn't produce the same returns. So they need to do another one of those things, which drives that price down, which causes the demographics that depend on that resource to run dry, etc... This is a metric for just one buffer: the amount of cash available to issuers of high interest bonds. Is that the tipping point? We don't know, and won't until it tips.
- mooglevich 1y ago
  Great comment :) I used to be pretty into junk bonds during my MBA (I don't do this at all professionally, so YMMV with my commentary here), and I think, as usual, a lot of context would help with understanding what this could mean, which ajross described. In the most simple terms, as other have also mentioned, it's basically non-investment grade companies (and there are a lot of em - you'd be surprised at the names on the list) now have to pay more for money. This could mean that investors are worried and want more compensation for risk, which means that the reality of the economy is shakier. OTOH, it could mean that investors are being more realistic, and not letting risky companies just have cheaper money to make value destructive decisions could be a good sign of sanity in the markets, and thus (in theory) the economy. It's hard to know with a simple headline or article. Even if you dig into all the numbers and do all the reading, it's still hard to know since the world is really complex. I look at this as a single data point amongst many re: how I end up assessing my feelings about the economy. Truth be told, I'm probably more concerned about what lots of news outlets are discussing - all the AI capex spend. Apparently there's more financing being negotiated with fewer restrictions on the debt, which tends to be a really bad sign of a bubble.
  - ajross 1y ago
    All that said, my slightly informed mildly-hysterical opinion is that aggregate downside risk is absolutely out of control in the markets right now. Valuations of basically everything are at all time highs relative to production. Volatilities are high. And non-economic risks are off the charts. Basically, everyone is placing too many bets. AI stocks are bets, sure. VCs have too much money in play. Datacenter spending is a giant bet. But the Trump administration is also placing bets on world trade markets, expecting to win the trade wars it keeps provoking. Likewise it's betting on US labor stability with mass deportations, and now para-sorta-maybe-martial-law decrees. I mean, let's be honest: the risk of a general strike in the USA is probably higher now than at any point in the last century. Oh, and Russia seems about to hit a tipping point in its refining capacity, which says dark things about Europe too if that goes awry. Basically most of these look "not really that scary" from a fundamentals perspective. But what are the chances we make it through the next 9-12 months with none of them having gone sour? And any of them could be the trigger for a real market crash! I'm moving almost everything out of volatiles, personally. The loss of the next 10-20% of upside seems like a good bet vs. what-maybe-50%-or-more downside.
quitit 1y ago
US Junk Bonds can be used as an early economic indicator. Potentially indicating downturns in GDP and increases in unemployment up to one year earlier than other indicators. When Junk Bond yields are low, it suggests investor confidence is high (and a low risk of corporates defaulting). The article notes that yields are rising, this is understood to be a signal of economic uncertainty (i.e. greater chance of defaults/increased risk of investing.) There are considerations to be made regarding about what caused the changes - in this case the presidents declaration of additional tariffs on China. Since this is an arbitrary decision, and not say the result of an economic trend, the certainty around the correlation is lower. Nevertheless the randomness of the actions are themselves a source of uncertainty, which too scares away investment.
fny 1y ago
This doesn't mean a lot. People made bets on lower rates which drove money into junk. Those prices renormalized to levels seen over the past year. In fact, lots of business had the opportunity to roll their debt over the past year, so bankruptcy in the medium term seems unlikely. The broader question is why now and so quickly. In my view, people got way over their skis in rate-based trades which drove a lot of things higher including tech multiples. This likely why we also have the NASDAQ down 3.5% in a single session. [0]: https://www.tradingview.com/chart/?symbol=AMEX%3AJNK https://www.tradingview.com/chart/?symbol=AMEX%3AJNK
Spooky23 1y ago
The weaker companies experience the impacts of financial stress more quickly, and investors start to flee to safety. Running an economy based on the whims of a decrepit old man and the weirdos he surrounds himself with introduces a lot of risk. It doesn’t mean that the end is nigh, but large money flows are going towards lower risk.
NoboruWataya 1y ago
It's difficult to say with any certainty what it means for the general economy, but your understanding of what this is saying about the junk bonds themselves is basically correct. Whether it leads to a lot of defaults depends on a lot of factors. A sell-off in bonds can really screw a company if it happens to have immediate financing needs at the time, but otherwise it doesn't really impact the company directly. Junk bonds are, as the name suggests, known to be risky assets, so they are generally the first to be sold when things get a bit choppy and investors decide to sit the market out for a bit to see how events unfold. This seems like it is pretty clearly a response to the recent tariff escalation so, as with all the other tariff announcements, it will depend on whether the recent announcement is a change in policy or another negotiating tactic. You also see a lot of headlines like "worst losses in six months!" "biggest sell-off since September!" but these are fairly short timeframes and a lot of this is just trying to make some news out of the usual market noise.
seanhunter 1y ago
Bond spreads widening reflect lenders' fear that borrowers will default. So what this means is that on average people think that the lowest class of borrowers (junk) are going to struggle to repay. That means it is more expensive for them to borrow, which is going to generally discourage those companies from investing in projects or starting new things which require debt finance. So you would expect the knock-on effect to be less activity in general.
Ekaros 1y ago
Barely surviving companies might die. And stop employing people, buying and selling... Thus they can then have at least short term effects on both up and downstream... So in worst case enough triggers might result in larger collapse. Basically big enough issue anywhere not just in AI might bring rest down with it.

this_steve_j 1y ago

https://archive.ph/sxOOn https://archive.ph/sxOOn

dmix 1y ago
> The US junk bond rally came to a halt on Friday with the biggest one-day loss in six months, as the risk premium surged to near a four-month peak of 304 basis points. Yields climbed to 6.99%, the highest in more than two months. > The losses accelerated after President Trump threatened to impose huge tariffs on imports from China and said he saw no reason to meet with Chinese President Xi Jinping, causing concerns about trade relations between the world’s two biggest economies. > The weekly loss of 0.73% was also the biggest since April. The losses spanned across ratings amid the renewed tariff fears. Junk bond yields rose 15 basis on Friday and 31 basis for the week, the biggest increase in six months. > CCC yields rose above 10% to a five-week high of 10.14% and spreads widened to a six-week high of 632 basis points. Spreads climbed 32 basis points on Friday, the most in one day since April. CCCs racked up a loss of 0.6% on Friday, the worst one-day loss in six months. CCCs closed the week with a loss of 1.05%, also the most in six months. graph https://dgz78a1ch9fm7v.archive.ph/sxOOn/4d36a1090f1a44927848814c63cbf300bba82f38.jpg https://dgz78a1ch9fm7v.archive.ph/sxOOn/4d36a1090f1a44927848...

francisofascii 1y ago

Seems like a non-story. Junk bonds are corralated with equities, so Trump's tariff comment caused equities and by association junk bonds to go down.

delfinom 1y ago
Yes, but there's also an indicator that the size of the losses is correlating to "size and sentiment of junk bonds", meaning, there may be a few too many building up. Ultimately, if equities seesaw enough, there can be some collapsing.

Havoc 1y ago

US economy in general is starting to make me nervous. Quite hard to diversify away though because that means missing out on AI boom and if the US shits the bed then chance are everything else gets sucked down with it

rkomorn 1y ago
Yeah, I really don't know what scenario leads to the US economy not dragging down the rest with it. Is there an argument that other economies would recover better than the US, in the long term? But at that point, one could just diversify during/after the crash.
- toomuchtodo 1y ago
  Not investing advice. I diversified away from the US to international equities VTI -> VSUX starting at the beginning of the year. My thesis is that trade is rearranging due to US trade policy. If you look at the S&P500, growth has been flat since 2022 for anything that isn't Big Tech AI bubble. Therefore, I believe that between go forward US economic policy and global trade reconfiguration, non US will outperform the US over the next five years.
  - rkomorn 1y ago
    Maybe not investing advice but reasonable-sounding nonetheless.
  - matwood 1y ago
    I also adjusted some towards VXUS which was a great move in hindsight from fx alone. I bought property in the EU a couple years ago which is also benefiting from fx moves. With that said, the biggest US companies are pretty exposed internationally already. I'm not sure someone needs to or it would be prudent to say dump VOO and move to VXUS 100%.
    - toomuchtodo 1y ago
      Agreed; to be clear, I still have US equities exposure, but it has been reduced to <50% of my total securities portfolio. This balances, imho, potential gains with managing risk around valuations. "Be fearful when others are greedy."

josefritzishere 1y ago

The Shiller ratio also indicates the US economy is in for a major correction. https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe

staticman2 1y ago
Yeah but trading based on Shiller ratio wouldn't have worked out so well in the last 10 years so who knows.